Do you have enough money to start your business?

Starting a business requires cash. Whether you need a little or a lot of money will depend on the type of business you’re getting into.

For example, you may need money to buy an existing business or pay an upfront franchise fee. Or, you may need money to start a business from scratch, spending it on things like equipment, inventory, wages, advertising and rent.

Along the way, you’ll definitely need some money to pay for your personal living expenses.

But how much start-up money is enough? You can figure that out by exploring your capital and operating cost requirements.

Two types of start-up costs

Your business plan should identify two types of start-up costs:

Capital costs. Includes upfront costs for things you (hopefully) won’t need to buy again for years. Examples are equipment, vehicles, office furniture, signage, renovations and legal expenses to set up the company. If you are buying a franchise then the franchise fee is an example of an upfront cost.
Operating costs. These are ongoing monthly expenses for items such as rent, wages, data charges, marketing costs, insurance fees, electricity charges and office supplies.

The first step is to research as best you can all of the capital and operating costs you will incur. Pick up the phone or go online to get accurate cost estimates from landlords, utilities companies, lawyers, office supply retailers and anyone else you will buy from.

Plug your numbers into this formula

While you may choose to raise as much money as you like in order to cover start-up costs, consider this handy formula to determine an exact amount:

Capital costs + 6 months’ of operating costs + 10 percent for unexpected expenses.

Why use this formula?

It puts all of your identified expenses upfront so you can raise enough money to cover them.
You might end up gradually writing off some capital expenses (such as paying monthly for a company vehicle instead of paying the full cost up front) in which case you’ll have some extra cash left over in your budget.
Raising enough money to cover 6 months’ of operating costs will give you 6 months to earn income—if cash comes in earlier, bonus! But you won’t be depending on that revenue. You might feel more comfortable raising enough money to cover 12 months of operating costs.
A contingency budget of 10 percent gives you a cash cushion to cover unexpected expenses that will pop up no matter how carefully you plan. You may also need this extra provision if the original cost quoted by a supplier changes. For example, some suppliers will only guarantee a price for 90 days—if you return to buy after that time the amount may change.

Where to get the money

Now that you know how much money you’ll need to launch your business, you can confidently approach these sources of start-up financing.

Personal funds

Do you have enough personal savings to cover your start-up budget? Self-funding will save you the time and effort required to pursue outside sources of finance. But don’t put your life savings into the business—consult a personal financial advisor to figure how much you can safely invest.

‘Love Capital’

You can ask family and friends for a loan or to invest in your business. Prepare a proper written agreement so there’s no confusion about how the money will be repaid and, make sure both of you are comfortable with this strategy.

Investors

Angel investors are businesspeople that want to invest in your business. They usually want two things from you: a chance to get involved in the management of the business, and a clear exit strategy.

Bank loan

Your financial institution will offer a range of financing solutions including term loans, lines of credit, business credit cards, and more. Find a banker you trust and explore these solutions.